By Tiernan Ray

Shares of Amazon.com (AMZN) are down $29.52, or 8.8%, at $307.63, after the company yesterday beat Q1 expectations on a 23% rise in sales, but forecast this quarter’s revenue lower and said said it might lose as much as $455 million on the operating line.

There is considerable scrutiny today of both Amazon’s rate of growth and its rate of spending, and whether the one justifies the latter.

One person throwing in the towel today is Raymond James’s Aaron Kessler, who cut his rating to Outperform from Strong Buy, and slashed his price target to $391 from $443, “Given the continued high level of investments as well as slowing unit growth and media sales.”

“While we remain positive longer-term on Amazon, the continued significant investment cycle is not showing any signs of letting up and we believe AWS is likely facing increasing price competition (Amazon CEO noted hundreds of millions of savings to AWS customers over the next several months).”

Kessler slightly raised his revenue number for the year to $91.25 billion, but cut his EPS to $2.96 from $4.12, on an adjusted basis.

Canaccord Genuity’s Michael Graham, who has a Hold rating on the shares, and a $365 price target, calls the quarter’s results “steady,” and the North American sales “solid,” but notes the collapse of profit margin on international sales “back below zero.”

Writes Graham, “We still see no International margin expansion in sight, due to a long list of investment priorities including fulfillment in places like Spain and China, and ‘early market’ inefficiencies in everything from product sourcing to warehouse operations.”

The company “we will be in “EPS push-out” mode for at least another year.”

On the plus side, Credit Suisse’s Stephen Ju reiterated an Outperform rating, and noted the company’s revenue growth of 23% was “strong,’ as was gross profit of 33.2%.

But he observes, too, that consolidated segment operating income of 2.5% was below his own 2.7% expectation:

Amazon reported CSOI margins that were modestly below expectations, slightly declining year over year, primarily as a result of increased investment in both technology and content and fulfillment that rose substantially year over year. We continue to believe that the company’s gross margin is suffering as a result of continued reinvestment for growth, and the company is poised to benefit from its investments in the form of margin expansion longer-term. CSOI margin represented 2.5% of net sales vs. 2.7% last year and 100 basis points below our 2.6% projection. Thus, CSOI, in absolute dollars terms, of $502 million was in-line with our $507 million forecast, increasing 14% year over year, and above the mid-point of guidance of $350 million.

The forecast, moreover, for CSOI of $200 million was below his own $308 million expectation. As a consequence, Ju cut his CSOI number for the full year to $2.2 billion from a prior $3.19 billion, and trimmed his target to $439 from $449.

Kerry Rice of Needham & Co., who has a Hold rating on the shares, ticking off the disappointing aspects of growth and expenses:

Despite the revenue upside, there were areas of weakness. Media revenue growth was subdued, decelerating sequentially and y/y in both regions. Only 7M net new accounts were added, the smallest number of adds since 2Q13. Unit growth also decelerated to 23% y/y, down from 25% in 4Q13 and 30% in 1Q13. Even with gross margin improvement and revenue upside, operating income of $146 million fell below expectations as operating expenses were nearly 10% above our estimates with technology and content expenses substantially higher than our estimates. GAAP EPS of $0.23 was slightly better than expectations of $0.21, but the upside was primarily as a result of an equity gain from LivingSocial’s sale of its Korean business.

Concludes Rice,

We are cautious about Amazon’s ability to sustain its revenue growth given the decelerating growth in Media revenue, paid units, and active accounts [...] we are less confident that the significant investments in new products, content, geographic expansion, and delivery options can produce a material contribution to sustain growth in the near-to-mid-term. Moreover, these investments coupled with capex for facilities and infrastructure have pushed operating expenses to new levels, which more than offset the improving gross margin and limit EPS growth.

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There are 3 comments

APRIL 25, 2014 3:44 P.M.

Anonymous wrote:

If I followed the numbers and cared about the stock I wouldn't be able to do it. The company itself and the guy running it and what he might possibly do next are as interesting as it gets to me.

APRIL 25, 2014 9:28 P.M.

Elvis wrote:

AMZN needs a 200 point haircut. At about 100 per share it begins to at least make sense. They're just piling on one break even initiative after another. So very little net profit, no dividends, and a 500 multiple. Same as ever.

APRIL 26, 2014 7:59 P.M.

@ Elvis wrote:

It has a 500 per because it has to be kept up since in a certain way it's the only game of its sort and tangentially it's a strategic asset etc in the new economy.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.